1. CHAPTER 2:
Investments
In Equity
Securities

2. Learning Objectives
LO1 To describe the broad relationship between all the relevant standards from Part I of the CICA Handbook that comprise the ‘big picture’ LO2 To distinguish between the various types of equity investments. LO3 To evaluate relevant factors to determine whether an investor has significant influence over an investee.

3. Learning Objectives
LO4 To prepare journal entries to account for investments under the cost and equity methods. LO5 To state the disclosure requirements related to an investment in associate. LO6 Analyze and interpret financial statements involving investments in equity securities. LO7 Identify some of the differences between IFRSs and ASPE for investments in equity securities.

4. Equity Investments: The Big Picture
LO1,LO2
Equity Investments: The Big Picture
Companies invest in the
shares of other companies for:
Strategic reasons: intending to maintain a long-term
relationship, and
Non-strategic reasons:
intending to hold for profit
Starting January 1, 2015 IFRS
9 requires all nonstrategic
investments to be reported at fair
value including private companies
which do not have a quoted
market value.
IFRS is developing a
standard for fair value
Measurement.
Strategic
Investments
Non-strategic
investments
Significant
Influences
Fair value
through profit
and loss
(FVTPL)
Control
_____________
Joint control
through joint
venture
Other – elect
FVTOCI
Available for – sale investments
(AFS) Category
no longer exists

5. Equity Investments: The Big Picture (see Exhibit 2.1)
LO1,LO2
Equity Investments: The Big Picture (see Exhibit 2.1)
Reporting methods for investments in equity securities
Type
Reporting method
Reporting
Unrealized gains
Significant influences
Equity method
Not applicable
Control
Full consolidation
Joint control through
Joint venture
FVTPL
Fair value method
In net income
Other – elect FVTOCI
In OCI

6. Equity Investments: The Big Picture
LO1
Equity Investments: The Big Picture
When IFRS 9 becomes mandatory in 2015, the
available-for-sale investment category disappears.
However an entity will still be able to elect to
report fair value changes on an equity investment
that is not held for short-term trading on other
comprehensive income (OCI)
This is the same treatment previously allowed for
AFS investments
Entities must group items presented in OCI in two
categories (net of tax)
- recycled through net income
- not recycled through net income

7. Equity Investments: The Big Picture
LO1, LO2
Equity Investments: The Big Picture
Directly related IFRSs
IFRS
Description
IFRS IO: Consolidate Financial Statements
If J Company controls K Company then J is the “parent” and must consolidate K the “subsidiary” by replacing J’s investment in K with the assets and liabilities from K’s balance sheet.
Control exists if J has the
power to direct the activities
to K to generate returns for J
Refer to IAS 28, IFRS 1, and
IFRS 9 if control does not
exist.

8. Equity Investments: The Big Picture
LO1, LO2
Equity Investments: The Big Picture
IFRS
Description
IAS 28: Investments in Associates
And Joint Ventures
An associate is an investee over which the investor exercises significant influence and is reported using the equity method.
Significant influence allows the investor to
participate in the strategic operating and
financial policies of the investees but does not
convey control or joint control.
An investment of between 20% and 50% of the
voting shares, without control being present, is
presumed to be significant influence in the
absence of contrary evidence.
Joint ventures must use the equity method

9. Equity Investments: The Big Picture
LO1, LO2
Equity Investments: The Big Picture
IFRS
Description
IFRS11: Joint Arrangements
Joint arrangements (“ventures”) have two or more owners (“Venturers”) that have a contractual arrangement among themselves to exercise joint control over the venture and therefore no venturer can exercise unilateral control.
The equity method is required when the investor has joint control over a joint venture
Some other types of joint arrangement report using proportionate consolidation. (Chapter 9)

10. Equity Investments: The Big Picture
LO1, LO2
Equity Investments: The Big Picture
IFRS
Description
IFRS 9: Financial Instruments -- Classification and Measurement
Nonstrategic equity investments are valued at fair value with changes reported in net income.
For equity instruments not held for short-term
trading an entity can elect on initial recognition to
record fair value changes in OCI, while recording
dividends received in income. Under this election,
gains and losses on sale of the investment are
cleared from OCI directly to retained earnings
without being reported in profit or loss.

11. Equity Investments: The Big Picture
LO1, LO2
Equity Investments: The Big Picture
IFRS
Description
IFRS12: Disclosure of Interests in Other Entities
Disclosure requirements for investments in associates, joint arrangements, non-controlled entities and subsidiaries.
Disclosure objectives that help users:
Understand the judgements and assumptions
used for classifying investments
Understand non-controlling interest in
consolidated entities
Assess the nature of risks associated with
interests in other entities

12. Equity Investments: The Big Picture
LO3
Equity Investments: The Big Picture
Other Related IFRS
IAS 27: Separate
Financial
Statements
A parent company does not have to issue consolidated financial statements if its parent issues consolidated Financial Statements
IFRS 3: Business
Combinations
A business can obtain control either by investing in voting shares or purchasing the net assets of another business. (Chapter 3)
IFRS 8: Operating
Segments
Disclosure of operating segments within consolidated financial statements (Chapter 9)
IAS 1: Presentation of
Financial statements include balance sheet (statement of financial position), and statements of comprehensive income, changes in equity and cash flows.
IFRS 12: Income Taxes
Refer to Chapters 6 and 9

13. Equity Investments: The Big Picture
LO1, LO2
Equity Investments: The Big Picture
Other Related IFRSs
IAS 21: The Effects of Changes in Foreign Exchange Rates
Addresses translation of the financial statements of foreign investees, subsidiaries, and joint arrangements, (Chapters 10 and 11)
IAS 36: Impairment of Assets
Applies impairment tests to all assets including investments in associates, goodwill, and intangibles. (Chapter 5)
IAS 38: Intangible Assets
Provides additional guidelines to IFRS 3
IFRIC 16: Hedges of a Net Investment in a Foreign Operation
Refer to Chapter 11

14. Investments Measured at Fair Value
LO1, LO2
Investments Measured at Fair Value
Fair Value Through Profit and Loss
(FVTPL) Investments
Include investment held for short-term trading and any other
investments reporting entity wishes to designate as FVTPL.
Classified as current assets since they actively trade and are
intended to be sold within one year.
Recorded at fair value. Unrealized gains and losses as well as
dividends received or receivable are reported in income

15. Investments Measured at Fair Value
LO1, LO2
Investments Measured at Fair Value
Fair Value Through OCI (FVTOCI) Investments
Classified as current or noncurrent assets depending on how long management intends to hold to these shares.
Unrealized gains/losses are recorded in other comprehensive income (OCI). Dividends are recorded in income.
When sold, previously unrealized gains and losses are removed from OCI and transferred directly to retained earnings.
IAS 39 (replaced by IFRS 9 in 2009) allowed Available For Sale (AFS) investments to clear unrealized gains to net income.

16. Investments Measured At Fair Value
LO1, LO2
Investments Measured At Fair Value
Other comprehensive income can be presented either at
the end of one single statement of comprehensive income,
or on a separate statement of other comprehensive income
(OCI).
In either case, both statements show “comprehensive income”
as the last line on the statement.
Net income is added to retained earnings and OCI is added to
“Accumulated Other Comprehensive Income” which is a
separate component of shareholders’ equity.

17. Investments Not Measured at Fair Value
LO3
Investments Not Measured at Fair Value
Reported using either the cost or equity method
Cost method:
Can be used to report control investments in non-consolidated
separate entity financial statements (Chapter 3)
Used for available-for-sale investments when market value is
not reliably measurable until 2015 (old IAS 39)
Can be used to record investments in controlled entities
(Chapter 5)
Impairment losses are reported in net income
Dividends are reported in income
Prior to 2009 Cumulative dividends received in excess of net
income since acquisition (“liquidating dividends”) were reported
in income
IAS 27 requires all dividends be reported in income

18. Investments Not Measured at Fair Value
LO3
Investments Not Measured at Fair Value
Equity method applies to investments in associates,
where the investee has the ability to exercise significant
influence. Indications of significant influence include:
Representation on board of directors
Participation in policy-making processes or decisions
about dividends and distributions
Material transactions between investor and investee
Exchange of management personnel
Exchange of essential technical information
Generally holding between 20% and 50% of voting
shares indicates the presence of significant influence,
which can also exist with less than 20%
Determination of significant influence requires the
application of judgment.

19. Investments Not Measured at Fair Value
LO3
Investments Not Measured at Fair Value
When one investor has control, other investors usually do
not have significant influence
The equity method records the investor’s share of the
changes in the associate’s shareholders’ equity
Adjustments are made for acquisition costs greater
than book value, unrealized intercompany profits,
impairment losses, and other factors.
The equity method provides information on the potential
for future cash flows.

20. Investments Not Measured at Fair Value
LO4
Investments Not Measured at Fair Value
Using the equity method, the investor:
Records its proportionate share of the investee’s operating
income as its own operating income
Reduces the investment account by its share of investee
dividends received
Records its proportionate share of the investee’s non-
operating income (e.g. discontinued operations,
comprehensive income) separately
Amortizes acquisition costs greater than book value of
investee (“acquisition differential”) – discussed in later
chapters
Eliminates after-tax unrealized intercompany profits
(Chapters 6 and 7)

21. Equity Method Accounting
LO4
Equity Method Accounting
Initial investment is recorded at cost
EXAMPLE
On January 1, 2013, New Inc. buys 30% of Newer
Co for $1,500,000 cash.
Prepare the journal entry to record the acquisition
On New’s books

22. Equity Method Accounting
LO4
Equity Method Accounting
Each investment has a unique account
GENERAL JOURNAL Page 1
Date
Description
Debit
Credit
1- Jan
Investment in Newer Co.
$1,500,000
Cash
To record investment in Newer

23. Equity Method Accounting
LO4
Equity Method Accounting
Investor recognizes its share of investee’s net
operating income (loss) on the income statement
Based on percentage ownership
EXAMPLE
For all of 2013, Newer’s net operating income was
$400,000.
Prepare the journal entry for New.

24. Equity Method Accounting
LO4
Equity Method Accounting
New’s ownership percentage x Newer’s net Income = 30% x $400,000 = $120,000 GENERAL JOURNAL Page 100
Date
Description
Debit
Credit
31-Dec
Investment in Newer Co.
$120,000
Investment Income
to record equity in Newer net operating income

25. Equity Method Accounting
LO4
Equity Method Accounting
Dividends paid by the investee are treated as a
reduction of the investor’s investment account
EXAMPLE
Also in 2013, Newer paid $70,000 of dividends to
Its shareholders
Prepare the journal entry to record New’s receipt
of its portion of the dividends from Newer.

26. Equity Method Accounting
LO4
Equity Method Accounting
New’s ownership percentage x Newer’s
dividend = 30% x $70,000 = $21,000
GENERAL JOURNAL Page 100
Note: If Dividends are declared debit Dividends Receivable
Date
Description
Debit
Credit
31-Dec
Cash
$21,000
Investment in Newer Co
to record receipt of dividend from Newer Co.

27. Equity Method Accounting
LO4
Equity Method Accounting
The initial investment is recorded at cost
The investee’s net income (loss) results in a
proportional increase (decrease) in the investor’s
account.
The investor’s investment account is reduced by
the amount of the dividends it receives from the
investee.
Investment in Newer
$1,500,000
120, $21,000
$1,599,000

28. Equity Method Accounting
LO4
Equity Method Accounting
Investee records its share of investee’s non-
operating income/loss
EXAMPLE
Also in 2013, Newer recorded a discounted
operations loss of $100,000 (net of tax) and
$10,000 other comprehensive income (net of tax)
Prepare the journal entry to record New’s portion
of this loss from discontinued operations and other
comprehensive income.

29. Equity Method Accounting
LO4
Equity Method Accounting
New’s ownership percentage x Newer’s discontinued
operations loss = 30% x $100,000 = $30,000
New’s share of other comprehensive income =
30% x $10,000 = $3,000
GENERAL JOURNAL Page
Date
Description
Debit
Credit
31-Dec
Investment in Newer Co
$ 27,000
Discontinued operations -investment loss
$30,000
Other comprehensive income
$ 3,000
to record discontinued loss and other comprehensive income from Newer

30. Equity Method Accounting
LO4
Equity Method Accounting
Investor amortizes acquisition costs paid in
excess of book value (“acquisition differential”)
EXAMPLE
When New paid $1,500,000 for Newer on January 1, 2013
Newer’s net book value was $5,000,000 (New’s 30%)
share = $1,200,000). New’s $300,000 acquisition
differential was attributable entirely to a building owned
by Newer, with a 20–year remaining life, the fair value of
which was $1,000,000 greater than its book value.
Prepare the journal entry to amortize the acquisition
differential on New’s books for 2013

31. Equity Method Accounting
LO4
Equity Method Accounting
New’s ownership percentage x acquisition
differential allocated to building / remaining life
= 30% x $1,000,000 / 20 years = $15,000
($300,000 / 20 years)
GENERAL JOURNAL Page
Description
Debit
Credit
31-Dec
Investment Income
$15,000
Investment in Newer Co.
To amortize acquisition differential re Newer Co.
this is further discussed in Chapter 5

32. Equity Method Accounting
LO4
Equity Method Accounting
Investor eliminates unrealized profits on
intercompany transactions until the assets are
sold to outsiders or consumed by the purchaser.
EXAMPLE
In 2013 New sold inventory for $100,000 to Newer and
recorded a 40% gross profit on the transaction. Newer’s
inventory still contains all of these items on December 31,
2013. New pays income tax at a rate of 30%
Prepare the journal entry to eliminate the unrealized
Intercompany profit on New’s books for 2013.

33. Equity Method Accounting
LO4
Equity Method Accounting
Downstream sale (investor selling to investee,
investor’s books reflect profit) eliminate 30% x
$100,000 x 40% gross profit x (1-30% tax rate) =
$30,000 x 40% gross profit x 70% = $8,400
GENERAL JOURNAL Page
Date
Description
Debit
Credit
31-Dec
Investment income
$ 8,400
Investment in Newer Co.
to eliminate unrealized downstream profit on sale to Newer Co.
this is further discussed in Chapters 6 and 7

34. Other Equity Accounting Considerations
LO1, LO2
Change from FVTPL to equity method: once
significant influence is achieved on an investment
previously reflected as FVTPL, begin using equity
method prospectively.
Change from equity method to FVTPL: if significant
influence is lost, begin using fair value method
prospectively; adjust investment to market value
at date of change and at each reporting date and
report adjustments to fair market value in profit
and loss.

35. Other Equity Accounting Considerations
LO4
Other Equity Accounting Considerations
Losses Exceeding Investment Account Balance (IAS 28):
If investor has guaranteed investee’s obligations or is
committed to providing additional financial support,
continue recording losses and reflect negative
investment balance as a liability.
If there are no such guarantees or commitments, leave
investment balance at nil and begin recording future share
of investee profits only after they exceed the investor’s
share of previous losses not recognized.

36. Other Equity Accounting Considerations
LO4
Other Equity Accounting Considerations
Impairment losses (IAS 36):
Compare the investment’s recoverable amount (higher of
value in use and fair value less costs of disposal) to its
carrying amount and if recoverable amount < carrying
amount, then write down to recoverable amount. Write
down can be reversed if recoverable amount increases in
future.
Gains and Losses on Sale of Investments: When a portion
of shares held are sold, gain or loss is calculated based
on average cost of shares sold not FIFO, LIFO or specific
identification.

37. Analysis and Interpretation of Financial Statements
LO6
Analysis and Interpretation of Financial Statements
See Exhibit Impact of Reporting Methods
on Key Financial Ratios (see also Self-Study 2)
The FVTPL investment must be shown as a
current asset, whereas the other investments
could be current or noncurrent depending on
management’s intentions.
The FVTPL investment shows the best liquidity
and profitability.

38. IFRS versus ASPE CICA Handbook Part II Sections 3051 and 3856: LO7
Permits use of either equity or cost method to account for all
significant influence investments that are not publicly traded on
the same basis.
Investments in and income from cost-accounted investments
should be reported separately, net of any impairment losses
which are reported in net income.
Allows investors to elect to report any equity investment at fair
value -- report in net income.
Prohibits use of the cost method to account for publicly traded
investments, which must be reported at fair value with changes
reflected in net income.
Does not require amortization of the acquisition differential
Other comprehensive income does not exist under ASPE.